As we enter the fourth quarter of 2012, two influential commentators have questioned whether Germany should exit the eurozone. Earlier this month, George Soros argued that Germany must either lead or leave the eurozone. This week, Financial Times columnist Martin Wolf also considered the question and argued that Germany will have to pay a high price for her mercantilist policies.
The fact that German Chancellor Merkel has come out openly to overrule the Bundesbank president on commitments to the euro suggests that there is now political commitment to hold the eurozone together. After the German constitutional court agreed to Germany providing bailout for the other countries, the markets seemed to have rallied, but by the end of September, interest rates on Spanish debt seemed to have risen again back to the sensitive 6 percent threshold. Financial markets do not seem to have too much confidence in the politicians.
Political will aside, there is now consensus that even if the eurozone holds, it will be a long hard road to recovery, which may take at least five years or more. After a lot of acrimony, there seems to be some consensus that any strategy to get the eurozone back to health will require the solution of at least four major conditions.
The first is clearly the restoration of confidence in the euro, essentially requiring all 17 governments to demonstrate their political and financial commitment by deeds rather than words to eurozone integrity. This means that politicians must be willing to take the political pain and make available the financial firepower to get through the dark night before dawn.
The second is to address the structural divide between the surplus and the deficit countries, with Germany, the Netherlands and north Europe on one side and southern Europe on the other. This requires a unitary fiscal system and a unified banking system, instead of trying to loosely coordinate 17 disparate national systems.
The third to address the immediate issue of high interest rates causing both solvency and liquidity problems in the deficit countries. Money is flowing away from deficit countries (causing liquidity squeeze and high interest rates to reflect credit risk) to surplus countries or even outside Europe. The European Central Bank is recycling the liquidity, but ultimately, it is the surplus countries that will have to bear the credit risks of default. Just like the Fed, quantitative easing in the form of QE3, LTRO or whatever name you call it, is only a temporary pain-killer that buys time for the politicians to address the structural issues.
The fourth is to get enough growth back into the eurozone and slowly work down the debt overhang. There are political limits to austerity if the unemployment rate is north of 25 percent, particularly for the youth.
The euro-sceptics are those who think that it is easier to have a breakup. I find the logic of asking the engine-room of a super-tanker to exit the ship just because the front part of the ship is underwater a bit curious. The sinking of the euro super-tanker will not only be a disaster for Europe but also the whole world.
I have been reluctant to comment on Europe in case I am classified in the category of Eastern gloaters. Asia actually has some similarities to the European problem ― aren’t many national banks stuffed full of long-term sovereign debt too? Asia was saved from this round of crisis because it suffered the Asian financial crisis 15 years ago. Don’t overspend and don’t overborrow. There is nobody, not even the IMF, which will relieve you of your pain when you do.
A Japanese friend admitted to me that Europe finally killed the idea that a unified Asian currency zone would be a good thing. Indeed, the European crisis has poured cold water on the idea that we can have a single global currency, as long as we have nation states with no global governance architecture.
The European crisis proves once again that ideas that are part of the problem cannot be part of the solution. The founding fathers assumed that the unity of democratic states through a single currency would lead to political unity, forgetting that as long as national sovereignty is not ceded to a central authority, there is no way that loss allocation within the union can be distributed easily. Losses are being distributed currently through crisis.
The central political question in Europe is whether asking Germany to bear the losses means that Germany will be given political leadership on the fiscal and financial issues. Germany fought two world wars because the answer to both question was no.
This is why I find the argument that Germany being mercantilist neither convincing nor helpful. Most people forget that Germany was the economic laggard in Europe in the 1990s, having a lost decade in reintegrating East and West Germany. Germany rebuilt her economy despite a rising euro in the last decade because her corporations, large and small, worked with the unions to get back productivity, whilst the deficit countries more or less relaxed.
We live in a multispeed world where there will always be imbalances, some demographic, some technological, some unintentional. The self-order of markets and disorder of statehood means that we have yet to find the necessary global solution to allocate losses from national imbalances. We do not have the mechanism to foster shared interests to deal with shared pain.
Crises have phases. At the early phase, there is denial that the problem is serious. In the middle phase, there is recognition, but no one is willing as yet to take the pain of creative destruction. Blaming each other will not ease the pain of structural adjustment. Postponing the pain through printing money is a double-edged sword. You buy some time, but politicians may be lulled into thinking that printing money is a solution, rather than a salve.
It will not benefit Germany or the world for her to exit the euro.
By Andrew Sheng
Andrew Sheng is president of the Fung Global Institute, a Hong Kong-based, independent and non-profit think tank. ― Ed.
(Asia News Network)
